BILL Holdings, Inc. (BILL) Earnings Call Transcript & Summary

All right. Good afternoon, everybody. Thank you for joining us. We have with us John Rettig, the CFO of Bill.com. John, thank you so much for joining us. We appreciate having you here.

I know it's a busy and exciting time for the company with everything that's going on. Maybe let's kick it off at the top. Just on the core business, it appears to be firing on all cylinders, right? North of 70% organic core revenue growth last quarter, retention is elevated, net retention was at very high levels. Just maybe let's start with why the business is doing so well? And why you're seeing kind of both expanded usage and such stickiness with your customers?

Yes, you bet and it's great to join you, Samad. And we're really pleased with our ability to attract, retain and grow relationships with our SMB customers. And I think some of the metrics that you alluded to are just a reflection of the success that we've had. We were up to 85% gross retention in the last quarter and 124% net revenue retention. And it's a reflection really of the mission we've been on the company for the last 15 years to make it simple to connect and do business. We help companies automate their financial processes and payments related to AP and AR, more recently, corporate cards and spend management, and they get to focus more time on running their business. And I guess the important thing to understand about this small business segment that we serve is most of these small businesses, they operate in an analog world for the back office. They're not steeped in cloud technology and mobile and other capabilities, and they're using legacy manual, paper-based processes for AP and AR and things like that, paper contracts, invoices, checks, all those things. And so because they don't have dedicated staff that's focused on technology and infrastructure, they look for solutions that are really simple to adopt, and that's where we come in. We have a product that enables really small companies to go digital in a day by adopting our platform, this is what makes it really sticky to those metrics earlier. So low price point, easy to use, doesn't take consultants to get up and running. They can do it in 15 minutes on their own. And once our customers add users and start to get their payment flows into the platform, we find that it's really sticky. And as a result, it's kind of mission-critical as opposed to a nice-to-have product that you evaluate, switching out periodically. So that's kind of the progress that we've had. And one of the things that we're excited about is with a large customer base, we've got this ongoing and active dialogue with customers. We listen to what their challenges are. We take feedback on how we can help them. And that's sort of the process that we use to prioritize our product road map and what we can add to the platform over time.

Great. I think with that lead-in, I think everybody is anticipating asking kind of the biggest story of Bill over maybe the last few months has been the acquisition of Divvy and I'd include Invoice2go in that as well. I know it's only been a few months since the acquisition closed, but how is the integration going so far? And is the logical conclusion to have it as just a one platform where Divvy just is folded into Bill.com?

Yes, it's a great question, Samad. We're making progress on the integration, you're right. It's quite early, but we've learned a few things already. First and foremost, that the Divvy team is awesome, and they are experts in the space and really understand customer needs. We've started on product integration activities and as well as initial kind of go-to-market motions related to cross-selling Bill.com customers on the Divvy spend management solution. And we're also starting to leverage joint capabilities very early in bringing the companies together. One example of that is in the risk management and underwriting area where we've kind of already merged the teams, and we're starting to take advantage of the large Bill.com data asset and some of our machine learning capabilities to enhance the risk capabilities of Divvy. And that's important because ultimately, it leads to being able to serve more customers successfully. As we think about the combination going forward, it is a key step in our kind of one-stop shop strategy. Ultimately, we hear from customers that the more they can do in one platform and the fewer point solutions they can have, the more value they can create because they save time in the back office and they can redirect that time to growing their business and serving customers. And so longer term, we definitely envision a fully integrated solution where customers have access to all of our solutions in one place. It will obviously take time to get there, and we'll communicate that time line once we have a better handle.

Great. And maybe sticking with Divvy, the technology integration, I think, is one part of the story. But when the company gave guidance, it sounded pretty clear that it was the 2 companies more so on a stand-alone basis, but I think the revenue synergies are also another attractive part of the combination. So where should we see the biggest synergies coming from the 2 companies joining forces?

Yes. I think, in the near term, so over the next year, it's really about exposing the Divvy capabilities, the smart corporate card and elegant software to the Bill.com customer base. We did a lot of research before the acquisition. We talked to customers. We learned what their pain points are. We talked to customers of Divvy to other products. And we found that there's a huge market opportunity here. And because of our large customer base, that's where we're starting. Typically, Bill.com handles about 70% to 80% of our average customer's nonpayroll B2B spend. And the part that we don't normally handle is the card spend. We might have the transaction where a customer is paying their card balance at the end of the month, but we don't have the individual transactions. And we've heard from customers that if they could bring that into the Bill.com platform and not have to go online to their bank or some separate solution that there's a lot of value. So that's where we're focused initially. And then I think there's also a need on the other direction for bringing some of the Bill.com solutions to sit alongside the Divvy spend management capabilities because they've heard demand from their customers for new ways of managing AP as well. So I think there's a big opportunity. We do know that most SMBs have a card program. They have some sort of card that they're using in their business. In many cases, it's the owner's personal card. They haven't gotten large enough yet to get into a corporate card program. And so with this solution, combined with Bill.com, we're going to be able to deliver more control, more transparency over card spend for customers. And it will take some time for that to translate into driving revenue results, synergy revenue results, which is what led to our commentary around guidance that we know we'll make some progress in the go-to-market and integration motions this fiscal year, but it's not likely until next year that we start to see the material results of that given the ramp time associated with customers adopting the product then converting spend.

Understood. Maybe just -- and this one, I think, is maybe a little technical, but just I think one thing we get asked a lot about is the economics of a Divvy transaction, right? And so if you could just maybe just walk us through an example like if it's less -- I think you said 200, 250 basis points on the public call is the typical fee. How does that get split up for those that just may not be as familiar with this world?

Sure. Just to recap, we earn interchange fees of approximately 200 to 250 basis points on the card spend from the Divvy platform. So these are the transactions that customers are executing. And the amount of that fee, the reason there's a range is it depends on the size of the transaction, what -- which card is being used, whether it's a Visa or a Mastercard, the merchant who's accepting the card payment, what their discount rate is, so on and so forth, so there's lots of variables there. In revenue terms, from our June -- our Q4 results where we talked about June for Divvy, they were about 230 basis points on card spend on average. So we work with both Visa and Mastercard, and our relationship with Visa involves gross fees, while Mastercard is sort of net. On the call, we also disclosed that Divvy has a gross margin. If you just look at them on an isolated basis, about 10 percentage points higher than the Bill.com stand-alone business. And then there are some other expenses that are incurred that are directly tied to card spend. So they think of these as variable expenses. And these are things like rewards, incentive rewards, credit losses, maybe some fraud exposure and interest costs. And the interest costs are associated with the capital markets activity that we have in order to support the card spend, and ultimately, the accounts receivable asset. Together, these costs are about 140 to 150 basis points in total, and they appear obviously in different places on the P&L with the interest cost being in other income and expense. But those are kind of the rough economics of a Divvy card spend transaction.

I think that's really helpful. And I'll move on from Divvy since there's a lot more going on at Bill.com than just that. But maybe on a different acquisition, I think Invoice2go rounds out the AR side of the portfolio. I know that the deal just closed a few weeks ago. Can you give us a better sense of what their growth rate looked like? And maybe what their business model looked like?

Sure. I mean, Invoice2go is pretty exciting. They've been focused on AR for 20 years. It's not a start-up. They've been thinking about the AR persona, what the customer needs are, how to help them solve that. And they have this great solution that is really a mobile-first product. It helps customers manage their online presence, customer relationships, develop quotes, invoices, accept payments and ultimately, improve their cash flow, which is what it's all about. So just a quick profile on the business. They have an international footprint with about 225,000 customers in more than 150 countries. 60% of their customers are outside of North America. And about half of their customer base is really the 1-person businesses, so freelancers, sole props, things like that, which is actually a new segment for Bill.com, so we think it expands the market opportunity for us. The business is about $35 million in ARR as of the month of June. And the business model is mostly subscription fees. So it's per user, per month, very similar to the Bill.com subscription revenue line item. And it's growing at a slower rate than Bill.com on a stand-alone basis. Historically, I think the range is 20% to 30% growth. And one of the reasons is that while they've been experts in AR and have a great recurring subscription model, they haven't done as much with payments. And so they've had a very small payment revenue stream, that's been outsourced historically. And we think that there's a really big opportunity there for us to apply the Bill.com payment expertise to the Invoice2go business model. They had about $25 billion in invoice volume through their platform in the last year, but only about $1 billion of it was monetized through payments at a very low rate. So we think that's one of the sort of immediate opportunities that we have is to help with rounding out the business model to that hybrid model that Bill.com has with both subscriptions and transactions.

Great. Maybe let's get back to Bill.com's core business, right? I think that we've seen a lot of success in driving better monetization through the company's more ad valorem offerings, right, or variable price offering. So maybe let's start with virtual card. You're continuing to see better adoption. Maybe how fine-tuned is the in-house supplier onboarding process? And how much room is there to kind of further improve that to drive more traction?

Yes. We're happy with the progress we've made, been making driving adoption. And I think we're starting to see like a return on our supplier enablement investments, even faster than we were expecting. And so we have a huge data asset that we're able to leverage to identify suppliers that are card-accepting and we apply both automation, technology and people to connect those suppliers with our buyers, and that's resulting in driving pretty fast adoption of virtual card payments. We more than doubled our virtual card penetration rate year-over-year to 2.2% of TPV as we reported in Q4, and our virtual card TPV for the year grew more than 300% in terms of TPV on virtual card. So that's -- those are just signs of the success that we're having leveraging our data and driving automation. And at some point, we'll start to turn our attention to enabling Bill.com network members to accept cards. Right now, our efforts are really focused on identifying those that already accept cards and then making it as friction-free as possible to start to deliver virtual card payments to them. At the same time, I should mention that we don't manage the business with an eye towards optimizing any one payment type. We really look at the overall portfolio of electronic payments and make sure that we're delivering the right payment type for that transaction between a buyer and a supplier so that it becomes a recurring transaction or a repeat transaction on the platform as opposed to the wrong payment type that might introduce friction.

Understood. And then I guess that brings me to a follow-up, which is, is there either a type of customer or payment size where a virtual card is the preferred or the best form of payment versus situations where it may not be as relevant as a form of payment?

Sure. I mean it's really up to the suppliers. But since they are the ones who are paying the merchant discount rate and therefore the fee for the transaction, the buyers, like an AP buyer, they don't pay for the transaction. So it's a supplier-funded transaction. And we find that slightly larger suppliers are more likely to already be a merchant and accept credit cards. But they're also sensitive to the cost of accepting a virtual card, which means they might have limits on the transaction size. So maybe it's $5,000 and below or something like that. It's less likely that we see big ticket transactions get paid via virtual cards. There are other options, including real-time payments with instant transfers or ACH payments and things like that to support those larger ticket transactions. But typically, it's a slightly larger supplier. Whereas the really small businesses, small suppliers, they're more likely to want like an instant transfer of real-time payment, which is slightly lower cost than a virtual card payment, and one where they don't have to go through the merchant setup process to accept credit cards. They can really just have it connected to their bank account.

So there's all these different type of payment methods that Bill enables. There's virtual card, there's ACH, instant transfer. So the digital payment portfolio is getting bigger. Is there -- how do you stack rank maybe the popularity of it in terms of where you see it moving, right? Or maybe by size, right? Is it -- is there typically a payment type that is more likely to be instant transfer? As you mentioned, some customers want that. But does it break down along the size lines or the size of the actual customer themselves where they're more likely to do a certain type of payment?

Yes, it really depends. And historically, with our business, the decision for what type of payment to use has been with the buyer on the AP side. But that's changed a lot in the last couple of years as we've introduced more payment products, and we're starting to give choice to both sides of a transaction. So it can be a buyer who decides or a supplier. An example of that would be like cross-border payments, where a U.S. buyer might want to eliminate currency fluctuation exposure and therefore, be invoiced in U.S. dollars. But it may be that, that international supplier doesn't even have a multicurrency bank account. They would much rather receive payment in local currency. So we can offer that choice and likely do it at a more competitive cost than they're going to get on that automatic conversion if they receive a U.S. dollar payment. And so those dynamics are at play with every transaction. And I'd say, ACH payments are probably the least friction, lowest-cost method. And that's why that is the most often used payment type across all of our transactions and millions of transactions a quarter. At the same time, it doesn't have as much data, an ACH transaction, as other forms of payments, so sometimes reconciliation can take a little bit longer. And it really just depends on the dynamic of any given transaction. We try to leverage our technology as much as we can. So AI and ML applied to our large data assets to try to propose what is the best payment method for buyer and supplier. But ultimately, we do give them a choice.

Great. And maybe one more on the payment types and we'll jump on to the company's go-to-market model. But we have called on to some banks to get smarter on the price of cross-border and it's expensive to send a payment through a bank. And so I'm just curious for most of your SMB customers, what are they doing to send cross-border payments if they're not using Bill.com? And how do you think about maybe the value proposition? Because at least based on what we've heard, it's very expensive to use traditional banking to set a cross-border payment.

Yes, that's fair. And I think a lot of it has to do with the fact that most small businesses, they don't even have like a dedicated treasury salesperson. They certainly don't have an FX line where they're purchasing currencies in advance. And we've made really good progress driving adoption. 4.1% of our TPV last quarter was cross-border payments. And so that's more than double the prior year. And what we find is that there's 2 key points where we can create value. One is by having the capability for cross-border sit inside of the same platform where the rest of payments are happening because the standard use case before we introduced this to our platform was that customers would record a transaction, a digital document, they would route it for approval with our workflow. And then they would go either online or in-person to their bank to schedule a wire transaction, which means now they've got data sitting somewhere else that they've got to get into the system. And so there's a lot of value created by having it in one place. And then with our scale, 121,000 customers, we did about $5.4 billion in cross-border TPV in the last year. We can actually be like a wholesale buyer of currencies and deliver a better price to our SMB customers than they're able to get like the standard rack retail rates from their banks. And so there's kind of two components to the value proposition, the ease of use and time savings and then ultimately, cost savings associated with a lower currency conversion rate.

Great. Let's jump to the company's go-to-market. I know that you guys rely heavily on partners. And maybe let's start with the financial institutions. You've announced several large deals in the last -- several large partnerships and expansions in the last 12 months. How should we think about the ramp of financial institutions? They're still hovering at about 10% of revenues. How should we think about that evolving over, let's say, the next 12 months or so?

Yes. We're a little bit below 10%. We've got about $147 million in remaining performance obligations, which is the total of the minimum commitments associated with all of our bank relationships, and that covers both subscription fees and transaction fees. I feel like we're making really good progress with some of the new agreements, which include KeyBanc and Wells Fargo, where we're now in market. It's at the very beginning of the sort of driving customer adoption and ramping phase, but nevertheless, we're making progress. And we have another agreement with a large bank that is not yet in market, but it's in the testing phase. So I think we'll start to see over the next year some acceleration in both customer adoption and the contribution, the percentage of revenue that comes from our financial institutions. And given the -- just the millions of businesses that these banks that we work with, think of American Express, JPMorgan, Bank of America, Wells Fargo, they reach millions of businesses, and that helps drive awareness for Bill.com that we capture either through the bank, white labeling our product or sometimes customers come to us directly. So we're really optimistic about the next few years with these relationships.

Great. And then maybe just on the technology partner side, I know that company, I think, is now integrated into Microsoft Dynamics and you have some other key software integration partnerships. Just how is that channel progressing in? And I know that -- there's a lot of companies you integrate into but only a much smaller list that are native, kind of real-time sync. And how should we think about that progressing? And how important that is for driving future adoption?

Yes, it's a good question. And we started our integrations with accounting packages and ERP systems by looking at which systems are most used by small businesses. So the QuickBooks franchise, Xero, Sage Intacct, things like that. And more recently, we've seen a lot more demand from the mid-market segment. So we define that as businesses between $10 million and $100 million in revenue. And it turns out Microsoft Dynamics is actually one of the largest market share leaders in that space. And so we did a real-time integration with them as well, it's Dynamics and Business Central, in order to better serve that mid-market segment because what many larger customers find is that while there might be equivalent features inside of the ERP system, the reality is it's lower cost and easier to use inside of Bill.com versus in the ERP system. And so we're seeing good success there. There are other integrations that we might have in the future. We haven't announced any of those yet. But the goal for us is to make it as easy as possible for customers to do business and connect with their suppliers. And so to the extent there's important technology they're leveraging outside of Bill.com, we'll try to connect to it.

Great. So this brings me to my last question. You've talked about making things easier for your customers, serving them everywhere they need. So I wanted to ask a big picture question, which is between your own AP platform, the recent M&A and your integrations, you're clearly working towards being -- you used the term one-stop shop earlier, right, for SMBs. When it comes to the back-office finance function, how should we think about how that evolves over the next several years rather than just the short term, right? How do we -- how do you continue to make progress towards being that one-stop shop for the back office?

Sure. In the near term, you should think of us as continually investing in adding new payment capabilities. The more choices that exists, the more share of wallet we capture from our customers, and we support their business, and that drives revenue. Over the longer term, we expect to invest in scaling our platform horizontally to cover more use cases and more of our customers' financial operations, whether that's moving further into the commerce activities between buyer and supplier with procurement and some of the things we can do with Invoice2go or further into the back office with other areas of financial operations that are still stuck in manual paper-based systems. These are things like payroll. We sit in the middle of transactions between buyers and suppliers. We think there's a huge working capital opportunity down the road to help companies gain more business, get paid faster, reduce friction and ultimately, scale and we want to be there for them.

Well, I have about 10 follow-ups to that, but lucky for you, John, we're out of time. So I really appreciate you joining us today. That was great and wish you guys all the best until our next conversation, but we're really glad that we were able to have you here with us today.

Great. Thanks, Samad.